To Default or Not to Default

Most Americans faced with a deeply underwater mortgage do not want to “strategically default.” A strategic default is when a homeowner decides it no longer makes sense for them to pay the mortgage on a home worth less than what is owed on it, and they decide to walk away. This type of action has long been considered highly irresponsible. But in this collapse of the housing market and plummeting housing values, some economists have condoned this type of practice since it makes sense from an economic view.

Two new research efforts from a leading real estate information marketplace (Zillow Home Price Expectations) suggests that there may be other reasons Americans choose not to default. Almost three quarters, 71%, of economists surveyed in June 2012 said they would not default on their homes, even if they owed at least 40% more on their mortgage than their house was worth in the current market. This survey was compiled from 114 responses from a varied group of economists, real estate experts, and In another survey, 59% of homeowners said they would not make the decision to default on purpose even if they were underwater on their home by more than 40%. This is even more surprising considering almost 75% of homeowners in the US with an underwater mortgage are underwater by 40% or more.

Economists agree that the reason people may choose not to default is not due to mathematics, since when you do the math, it can often be the best economic choice to default. But apparently for those who can still afford to make the payments on a declining investment moral and ethical considerations may control Approximately 37% of homeowners who said they would not strategically default stated moral reasons for not doing so, while 35% indicated it didn’t make sense because they intended to live in their current. This same survey also asked the same group of economists and housing experts their position on the adoption of government sponsored mortgage principal forgiveness initiatives for underwater borrowers.

The results of this survey suggest that economic and financial considerations are not always the predominant drivers of behavior for even deeply underwater borrowers. Regardless of moral considerations, many people that default on their mortgages do so because they experienced unavoidable financial hardships and they do not always have the luxury of choosing the morally responsible choice. Yet, no matter what your situation–if you can afford to pay or note–it is important that you realize that you have options to avoid foreclosure

One of the most useful involves a “short sale,” where you agree with the bank to sell the home for less than what you owe on it. Various programs are in place so that you can receive help arranging these deals without paying money out of your own pocket. In fact, in some situations you can actually receive relocation assistance to help get off to a new start. If you need help or guidance with these matters in New Jersey please contact one of our Burlington County short sale lawyers to learn more.